Objectives of Management Accounting - Essay Example

Objectives of management Accounting Objectives of Management Accounting Management accounting entails the process whereby a business prepares accounts and reports with the aim of providing accurate information about the financial transactions within an organization. The information provided through this process is essential in the decision making process within a business enterprise. Managers use such information to make key decisions that have an impact on operations within the organization. The reports produced through management accounting are used to fulfil the objectives, aims, and purposes of the organization and they are not for the use by external stakeholders such as shareholders and investors.

Thus, the objectives of management accounting are mainly internal and apply within the organization as opposed to financial accounting. The reports generated through management accounting can either be weekly, monthly, or even quarterly and can provide essential statistical information. This paper will describe the benefits of cost-volume-profit analysis, sensitivity analysis, breakeven analysis, as well as regression analysis and how they can assist in making management decisions. Cost-volume-profit (CVP) analysis is a principle of management that is helpful in providing an analysis of how the profit of the company is affected by changes in the volume of sales, as well as changes in the cost incurred during the production process.

Over the years, many organizations have used the technique in their operations and it is considered as one of the most important techniques in analyzing costs. CVP assists in making business decisions in a number of ways. One of the ways in which CVP is used in managerial decision making is when making simple calculations. The calculations involved in CVP are simple as compared to other methods of analysis. There are standard formulas that have been set, which are used in the analysis of costs through CVP (Kinney & Raiborn, 2013).

CVP can also be used in management decision making to determine the variable and fixed costs in the organization. Through CVP, it becomes possible to determine which costs are variable and the costs that remain unchanged in the production process. Variable costs entail the costs that increase when the level of sales in the business increase. Based on CVP analysis, examples of variable costs can be shipping charges, sales commissions, cost of direct materials, as well as delivery costs among others.

Fixed costs do not change even if there are changes in the level of sales within the business. Some examples of fixed costs are rent paid for the business premises, insurance expenses, cost of business license, as well as salaries of permanent employees who work for the organization (Kinney & Raiborn, 2013). In addition, CVP is essential in predicting the future performance of the company through analyzing the breakeven point. An evaluation of the BEP helps to determine the spending, as well as production of the company in the future and assess whether the volume of production is worth compared to the expected sales.

With the knowledge of the breakeven point, managers can increase the production in order to ensure that the company enjoys high amounts of profits. Moreover, since CVP relates to statistical analysis, the management can break down the decisions into probabilities as a result of which they can be used in making crucial decision in the organization (Kinney & Raiborn, 2013). The other benefit of using CVP analysis in the decision making process is because it gives a detailed description of the activities within the company.

When managers use CVP, they gain knowledge about the costs of the production and gauge whether the volume of sales will manage to cover the costs incurred. With detailed information, the management can also determine the effects of altering variables on the production and the overall performance of the company. Cost projections are essential in the allocation of resources and inputs in the production process (Kinney & Raiborn, 2013). Sensitivity analysis is a management accounting technique that helps to determine the impact of various values of independent variables on the dependent variables based on certain assumptions.

For example, it can be used to determine the impact of interest rates on the price of a bond issued by the government. In management accounting, sensitivity analysis helps to make predictions of the outcomes that certain decisions will have if there are any unexpected changes in the situation. In the decision making process, sensitivity analysis can be used as a tool for risk analysis whereby it determines the probability of a risk occurring if the company makes a certain investment. Thus, organizations can use this form of analysis to come up with risk policies that will predict the probable risks on investment (Saltelli, Tarantola, & Campolongo, 2004).

According to Saltelli, Tarantola & Campolongo (2004), through sensitivity analysis, the management has the capacity to wholly understand the investment project. This is because this form of analysis is essential in understanding the variables that have an impact on the forecasts of cash flow in the organization. The use of sensitivity analysis in decision making also emanates from the fact it gives a description of critical variables, and as a result, the organization can make decisions that will improve the variables that are seen as weak and may affect the performance of the organization negatively.

The management can also use sensitivity analysis to unearth the forecast that can be regarded as inappropriate. This way, the decision maker give more attention to variables that are seen as relevant. Break even analysis is a technique of financial analysis used by the management to evaluate the point at which the costs of revenue are equal to the revenue that the company receives. With break-even analysis, it is possible to calculate margin of safety; this refers to the amount revenues can fall while at the same time not going below the break-even point.

Break-even analysis is very essential in the decision making process. First, the management can use this technique to determine whether to buy or make an equipment. When there are few variable costs involved compared to the amounts that have to be paid to the supplier, then it would be appropriate for the organization to manufacture as opposed to buying. On the other hand, if the variable costs are higher than the costs to be incurred in buying an equipment, then purchasing rather than making is the best option (Cafferky & Wentworth, 2010).

The management can use the break-even analysis to determine the financial structure of the company. After determining the break-even analysis, it is possible to understand how profits behave compared to the output of production. This way, the financial structure of the company can be determined with a lot of ease. Break-even analysis can also be termed as crucial in controlling costs that might otherwise affect the profitability of the company. Break-even analysis helps to identify the costs that might not be noticed (Cafferky & Wentworth, 2010).

Regression analysis is a statistical technique that organizations use to determine how variables relate in the production process. While using this technique, the person investigating seeks to understand how one variable affects the other. For example, how an increase in the price of a commodity can affect the demand for the same product. In the decision making process, regression analysis can be used to predict the future. For instance, an organization can use regression analysis to determine the effects of changes in taxes on profitability, as well as predict how consumer spending will affect the operations of the organization.

In addition, regression analysis can be useful when companies want to expand to both local and international markets. This is because it can help to make predictions of changes in the market and how they will affect business. The management can also use regression analysis to correct errors in the decision making process and gain new insights on investment opportunities (Chatterjee & Hadi, 2012). References Cafferky, M. E., & Wentworth, J. (2010). Breakeven analysis: The definitive guide to cost-volume-profit analysis.

New York: Business Expert Press. Chatterjee, S., & Hadi, A. S. (2012). Regression Analysis by Example. Hoboken: Wiley. Kinney, M. R., & Raiborn, C. A. (2013). Cost accounting: Foundations and evolutions. Cincinnati: South-Western, Cengage Learning. Saltelli, A., Tarantola, S., & Campolongo, F. (2004). Sensitivity Analysis in Practice: A Guide to Assessing Scientific Models. Chichester: John Wiley & Sons